This short article focuses on just 4 fundamental areas of sound financial management that enable us to help law firms generate more profit from the work they already handle in the business; the best starting point to develop a plan to improve the firm’s performance, without the need to generate new business.
- Prepare a Funds Flow Statement. Profit and cash are different things – cash is entirely dependent on profit. To start understanding your business better, we complete a simple exercise to reveal what happened to the cash between two dates, e.g. between last year end and this, in a Fund Flow statement. It quickly reconciles profit to cash and the movements in the bank balance. It takes into account such things as whether more cash is locked-up in WIP and debt than last year, the movements in how much you have “borrowed” from suppliers by taking credit from them and, importantly, it accounts for how much partners have drawn.
- Track working capital. It’s not how much you bill or how much profit you make, but how well you manage Working Capital (and cash) that will determine whether you survive in the current economic climate. Profit Per Equity Partner (PEP) is interesting, but it has little to do with staying afloat when cash is running out. Being armed with where your cash went last year, is only a starting point to understanding and managing the daily dynamics of your business.Working Capital – the difference between current assets (WIP, debtors and cash) and current liabilities (creditors (including VAT), overdrafts and short term loans is a measure of whether you have enough cash (or potential sources of cash) to meet your payments, such as salaries, rent and VAT, as they fall due.
- Focus on Lock Up. Managing lock-up is not just the responsibility of the accounts department. It’s up to partners and fee earners to take responsibility for billing and debt collection and this needs to become a major element of monthly Key Performance Indicators (KPIs) and of the appraisal process. Here’s a simple example of the impact an improvement in lock-up can bring: A firm with a turnover of £6m has WIP and debt totalling £2.5m. This represents about 150 days of turnover – so on average, this firm carrying out work on 1st April won’t get paid until 1st September. If the firm can improve its lock-up by (say) 30 days, the cash position can potentially be improved by £500,000!
- Develop a structured set of KPIs relevant for the practice and for individual departments. Lots of firms have a “monthly reporting pack” that can be anything from 20 to 50 pages thick, that contains the key information you need, but because of the volume, it’s invisible! These firms suffer from information overload and “analysis paralysis”, leading to poor management through a lack of focus on what’s really important. These reports should be tabulated on only a few sheets of A4. Other measures should be included where they are significant and relevant for particular types of work. For example. firms with PI departments might include reports on disbursements and CFA success rates and fees achieved. Anything else can be run on an as-needed basis, perhaps to drill down to the cause of a specific problem.
The added value that can be gained from implementing measures as simple as these can is easily measured – they usually result in the business having more cash available! This article has highlighted only a few simple things that can quickly make a difference. Future articles will focus on profit improvement exercises, productivity measures, the continued need for time recording (especially in a fixed-fee environment), budgeting and forecasting, more on cashflow management and a more in-depth look at KPIs and how to use them.
For more information about our practice improvement reviews and half-day partner workshops, contact Andrew Taylor, Inpractice UK